Reference no: EM131512561
The Sunk-Cost Trap
The Sunk-Cost trap is one that I have myself fallen into, with regard to my first laptop. Some years ago, when I was a high school student, and needed a laptop to complete my assignments on the go, I got an old laptop my dad had previously used for his work. I was ecstatic about it. It was an Dell laptop with an i5 processor and 8gb of RAM. I thought it was incredible, and I loved that laptop. But very shortly after I received the laptop and started to create documents and PowerPoints, and download games, software and movies on it, the laptop started to lag in performance. I knew how much a new laptop would cost, and as I was in high school and didn't have a job at the time, I did not want to ask my parents to buy me a better laptop. Instead, I did some research and came to the conclusion to swap out some parts on the laptop. I started with the hard drive. I replaced the 512gb hard drive, with a 256gb SSD drive, which made a world of difference in start-up speed. The laptop went from taking 1-2 minutes to start, to taking about 20-30 seconds. I was amazed. At the time, that SSD cost me around $200, of which I was able to scrounge half the money, from mowing lawns around the neighborhood and birthday money. When I realized that I could not install all of the games and programs that I had, because of the smaller disk size. So, I opted for an external flash memory. This would allow me to keep the speed of the laptop good, without sacrificing disk space. I bought a 1 TB external flash storage for $250, again only scrounging up half of the cost through yard work around the neighborhood. What I didn't realize at the time, was the laptop only cost about $600, as it had no third party graphics card and no touchscreen capability. I spent 75% of the initial cost of the laptop upgrading it, when I could have sold the laptop for about 200-250 dollars. Then using that money, the money I raised from yard work and savings, plus some help from my dad, I could have bought a very nice laptop with very good specs that can do all of the things that I want it to without having to upgrade the sinking ship.
Anchor Traps: Burst of the Housing Bubble
It's natural to have a misconception about an idea or concept; we often base our decisions on outcomes of previous experiences and rationalize or conclude an "appropriate" outcome. This decision-making trap is known as an Anchor Trap. We can't prevent them from swaying our thought patterns, but there are ways to subdue the false assumptions created by anchor traps. Always questioning the solidarity of a decision by gaining insights from multiple perspectives is an effective method to prevent clouded judgments caused by anchor traps.
An example of an anchor trap can be seen when examining the United States housing bubble of 2006 and the imminent crash following. Forbes presents an article on the causes for the housing bubble as a huge government missight that initiated, prolonged, and deteriorated the financial crisis. They go on to mention the Federal Reserve Bank controlling the federal funds rate to below 2% which promoted a policy of "easy money," driving housing prices up (Robinson, 2009).
People began to believe that housing prices would continue to rise year after year: the anchor. When prices were steadily increasing, people that couldn't afford houses began buying and their mortgages were pooled together. This pooled money was invested into financial instruments that drove demand for mortgage-back securities sky-high, causing lenders to make risker loans. The Federal Reserve then increased the federal funds rate and people started to go into foreclosure, causing the burst and economic crash (Robinson, 2009).
No one foresaw the imminent crash seen in 2008, everyone was a victim of a countrywide anchor trap. They believed that, based on previous years, it would be possible to make an investment that they couldn't afford. People failed to consider what could happen in the future or how certain events would affect their financial situations. This anchor trap has ruined many people's lives, hopefully it can serve as a hard lesson learned.